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p. 675. Market and policy failureslocked

  • Avinash Dixit


‘Market and policy failures’ begins with monopolies and oligopolies. What are the effects of monopoly power? Many actions of consumers or firms have beneficial or harmful side-effects such as pollution. These positive or negative externalities depend on whether a market puts the correct price on that action. For a market to function well, the transaction parties must know what they are buying or selling. But there are information asymmetries. The effects of these can be seen through the lens of externalities, and the market failures resulting from these externalities can be remedied by Coasian or Pigouvian methods. Moral hazards, adverse selection, collective goods, the political economy of policy, and the recent financial crisis are also discussed.

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